Advocate General Ćapeta: EU law does not, in principle, preclude national legislation which allows for the screening of foreign direct investment of third country provenance even if implemented via an EU-based company
Such national legislation falls within the scope of the FDI Screening Regulation1 and thus must ensure that individual screening decisions are justified and comply with requirements of proportionality as required by the Treaty rules on the free movement of capital and the freedom of establishment.
In 2021, the Hungarian Minister for Innovation and Technology blocked the acquisition of a Hungarian company by another Hungarian company. The former company owns a quarry from which sand, clay and gravel are extracted. In its decision, the Minister explained that it would be contrary to Hungarian national interests, including the security of supply of those raw materials, to allow a company with indirect third country (Bermudan) ownership to take control of such a ‘strategic’ company.
In deciding on the validity of the Minister’s decision to prevent the acquisition, the Fővárosi Törvényszék (Budapest High Court, Hungary) has, in essence, asked whether EU law permits Hungary to put in place legislation which restricts foreign direct investment in EU-based companies if such investments are implemented via another EU-based company.
In today’s Opinion, Advocate General Tamara Ćapeta considers first, that foreign direct investments of third country provenance fall within the scope of the FDI Screening Regulation. That regulation covers investments of any type by which the third-country investor gains effective participation or control over an EU company. That also includes investment whereby a third-country investor indirectly gains control over an EU company, through acquisition of an EU company by another EU company, which is owned by that third country company.
Such investment falls within the scope of Article 207 TFEU and thus within the scope of the EU’s exclusive competence in the field of common commercial policy. Therefore, the FDI Screening Regulation, which enables Member States’ to enact screening mechanisms, should be understood as ‘delegating’ competences back to the Member States in an area in which they had previously lost them with the entry into force of the Lisbon Treaty.
Second, national screening mechanisms, enabled by the FDI Screening Regulation, must also comply with the rules of the internal market. National legislation has, therefore, to oblige those bodies that are responsible in adopting individual screening decisions to offer legitimate justifications for restricting capital flows. It flows from the FDI Screening Regulation that restrictions on capital movements may only be justified on grounds of security or public order. Such justifications can be relied upon only if there is a genuine and sufficiently serious threat to a fundamental interest to society. Further, any measure restricting capital flows has to be proportionate to the aim it pursues.
Looking at the justification for the Minister’s veto at issue in the present case, the Advocate General recognises that securing the supply of certain raw materials may, in times of crisis, be capable of justifying a restriction on foreign direct investment on grounds of public policy (or public security). These reasons may even justify restrictions of capital movement from third countries that otherwise cannot be accepted within the internal market.
In order to decide on the validity of the decision prohibiting the transaction at issue in this case, the national court has to assess whether the Hungarian Minister for Innovation and Technology has sufficiently explained why the indirect foreign ownership in the quarry at issue represents a genuine and serious threat to the security of supply of gravel, sand and clay in Hungary and whether the security of such supply could not have been achieved by a less restrictive measure.